Bubs says it is trying to recover $5.6 million in overdue debts from its exclusive China distributor, Hong Kong-listed Alpha Professional Holdings, while Alpha is seeking more than $20 million as compensation for ageing stock it can’t move. But this story isn’t a lineal tale of transactions.
Two wholly owned subsidiaries of Alpha Group, Willis Trading and Alice Trading, are at the centre of the dispute, owing Bubs $2.67 million and $2.99 million respectively, in relation to purchases made by Alpha between August/September 2022 and March 2023.
Alpha Group and the subsidiaries, particularly Willis, work closely as a distribution partner with AZ Global, Bubs’ exclusive channel partner and a major distributor of Australian infant formula brands into China.
AZ Global and Willis had a long-standing relationship with founder and former CEO Kristy Carr and former executive chair Dennis Lin.
In March 2022, Bubs announced an equity share deal with Willis, its largest corporate daigou distributor throughout FY21 and the first half of FY22.
The deal would give Willis a 4.82 per cent stake in the business, conditional on Alpha Group meeting product purchase milestones of at least $50 million in FY22 and at least $80 to $120 million in FY23.
It’s worth remembering that FY22 delivered Bubs’ first profit, a fivefold increase on FY21 daigou gross revenue, and Operation Fly Formula.
The first half of FY23 made short shrift of the FY22 successes. China’s Covid-zero policy and prolonged lockdowns had a devastating effect on the company, with China gross revenue down 66 per cent in Q2 alone. While performance in other markets was positive, the results showed a $44.4 million loss, $20 million impairment on its Deloraine Dairy, and sales in China down 48 per cent. It set the wheels in motion to where we stand today.
The board ousted Dennis Lin as executive chair and executive director, Carr took extended personal leave, the pair were then sacked by the board for failing to follow its instructions, Carr and Lin formed the Save our Bubs shareholder faction, rallied support – including from Willis Trading – and requisitioned an extraordinary general meeting, set for 27 July.
With that, let’s return to Willis, Alice, and the outstanding debt.
According to Bubs, Willis and Alice said the “previous Bubs management team” had promised Alpha the two could “unconditionally return any stock that they could not sell without any liability”, and now intend to return the stock for which they have not paid, meaning the $5.6 million.
Willis and Alice said they intended to return stock that has been paid for and delivered since August 2022, and would be seeking a refund of around $7.5 million. They were also looking for a $12.9 million credit in new stock for existing tins that were nearing expiry and therefore unable to be sold.
Bubs rejected the claims, noting the sales agreements with Alpha did not have provisions for the return of stock, sale on consignment, or a refund on goods because of Alice or Willis’ failure to sell them.
“The alleged claims would be contrary to the unconditional purchases made by the Alpha Group under the Sale and Purchase Agreements, the Willis Share Subscription Agreement, and the representations made by the former Bubs executive chairman and former CEO to the board and our auditors,” Bubs said.
While Bubs has requested more information from the companies, including who in the previous Bubs management team allegedly made the promises and evidence to support their claims, Willis said it would “endeavour” to provide the information by 28 July. The day after the EGM.
Bubs chair Katrina Rathie said, “The board is determined to fully investigate these allegations and will take whatever action is necessary to protect the company and our shareholders’ interests.”
